13. WARRANTS

Private Placement, Placement Agent and Subsequent Financing Warrants

The warrants issued in the Private Placement and the Placement Agent Warrants (as described in Note 12) are considered free standing instruments that are contingently redeemable and classified as liabilities on the Company’s condensed consolidated balance sheet as of March 31, 2017. The warrants became exercisable to purchase common stock after the Company obtained the Requisite Stockholder Approval on June 16, 2016. Upon the closing of the Private Placement on April 14, 2016, the Company recorded an estimated fair value of $3.3 million relating to warrants to purchase 1,975,580 shares of common stock that were issued in the Private Placement. The warrants were comprised of warrants to purchase 1,775,580 shares of common stock that were issued to certain accredited investors measured at an estimated fair value of $3.0 million, and Placement Agent Warrants to purchase 200,000 shares of common stock measured at an estimated fair value of $0.3 million. The Placement Agent Warrants were issued for services performed by placement agents as part of the Private Placement and were treated as equity issuance costs and were recorded in stockholders’ equity on the Company’s condensed consolidated balance sheets to offset the Private Placement proceeds allocated to the Series A Preferred and common stock.

Additional warrants were issued on June 15, 2016 to the Majority Shareholders upon the closing of the Subsequent Financing (as described in Note 12). The warrants issued in the Subsequent Financing were also considered free standing instruments being accounted for using the same methodology as described above. On June 15, 2016, the Company recorded an estimated fair value of $1.7 million for warrants to purchase an aggregate of 1,002,507 shares of common stock issued in the Subsequent Financing.

The initial total estimated fair value of the warrant liability was $5.0 million following the closing of the Private Placement, the issuance of Placement Agent Warrants and the closing of the Subsequent Financing. As of December 31, 2016 the total estimated fair value of the warrant liability was $5.2 million and as of March 31, 2017, the total estimated fair value of the warrant liability was $2.3 million. The corresponding remeasurement income of $3.0 million for the three-month period ended March 31, 2017, was recorded in change in estimated fair value of common stock warrant and derivative liabilities on the Company’s condensed consolidated statement of operations.

JGB Debt Warrants

In connection with the issuance of the JGB debt (as described in Note 11), the Company issued warrants to purchase up to an aggregate of 1,250,000 shares of the Company’s common stock. The exercise price of the warrants is $5.00 per share, and the warrants are exercisable from September 16, 2017 through September 15, 2022. The initial estimated fair value of the warrant liability was $0.9 million. As of March 31, 2017, the estimated fair value of the warrant liability was $0.5 million and the corresponding remeasurement income of $0.4 million for the three-month period ended March 31, 2017 was recorded in change in estimated fair value of common stock warrant and derivative liabilities on the Company’s condensed consolidated statement of operations.

The Company determined that the warrants and the Debentures were free standing instruments for accounting purposes. The terms of the warrants include a down round protection, which precludes the Company from classifying the warrants in equity. As such, the warrants are classified as a liability and allocated their full fair value on day one and the residual value, after allocation of the fair value of the derivative is ascribed to the Debentures. In addition, the warrants will be re-measured at each reporting period and change in fair value will be recognized in the consolidated statement of operations. See also Note 4, “Fair Value Measurements”.

Warrant Valuation

The Company utilizes a Monte Carlo simulation model to estimate the fair value of its warrants. The Monte Carlo simulation model uses multiple input variables to estimate the probability that market conditions will be achieved. These variables include the Company’s stock price, the expected term of the warrants, the volatility of the Company’s and its peers’ stock prices over such expected term, and the risk-free interest rate for the expected term of the warrants. The variables used in this simulation model are reviewed on a quarterly basis and adjusted, as needed. If the Company issues common stock at a price lower than the exercise price or issues stock options or other securities (other than securities issued pursuant to the Company’s stock or option plans or employment agreements, securities issued or issuable upon exercise or exchange of convertible securities outstanding as of the date the warrants were issued or securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company) with an exercise price that is lower than the current exercise price of the warrants, the exercise price of the warrants shall be adjusted to be equal to such lower price. As a result of the anti-dilution provisions in the warrants issued in connection with the Private Placement and the Subsequent Financing, the exercise price of the 1,775,580 and 1,002,507 Private Placement and Subsequent Financing warrants, respectively, was adjusted from $4.98 per share to $4.00 per share, which was the price paid by investors in the Public Offering. The number of warrants outstanding did not change.

As of March 31, 2017, outstanding warrants to purchase Common Stock were:

	Original Term	Exercise Price		Number of Shares Underlying Warrants
Original issue date:
February 2008	10 years	$	35.10		22,792
August 2009	10 years	$	21.78		33,473
July 2010	9 years	$	21.78		6,694
December 2010	7 years	$	21.78		17,215
August 2012	7 years	$	21.78		167,182
January 2015	5 years	$	6.96		34,483
April 2016 (a)	7 years	$	4.00		1,775,580
April 2016 (b)	5 years	$	3.99		200,000
June 2016 (c)	7 years	$	4.00		1,002,507
March 2017 (d)	5 years	$	5.00		1,250,000
					4,509,926

(a)

Issued on April 14, 2016 in connection with the Private Placement to certain accredited investors. The exercise price was reset from $4.98 to $4.00 as a result of the Public Offering that closed on September 26, 2016. In accordance with the anti-dilution provisions, the exercise price of the warrants issued in connection with the Private Placement reset from $4.98 per share to $4.00 per share, which was the price paid by investors in the Public Offering, which closed on September 26, 2016.

(b)	Issued on April 14, 2016 in connection with the Private Placement to placement agents.

(c)

Issued on June 15, 2016 in connection with the Subsequent Financing. The exercise price was reset from $4.98 to $4.00 as a result of the Public Offering that closed on September 26, 2016. In accordance with the anti-dilution provisions, the exercise price of the warrants issued in connection with the Subsequent Financing reset from $4.98 per share to $4.00 per share, which was the price paid by investors in the Public Offering, which closed on September 26, 2016.

(d)	Issued on March 15, 2017 in connection with JGB Debt.